Qualified vs. Non-qualified dividends: What business owners need to know

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise US Inc. or its affiliates, and it is not intended as a substitute for obtaining business advice from a Certified Public Accountant (CPA) or tax lawyer

When your business earns dividend income from investments, the more you know about tax treatment can mean the difference between paying 15% or 37% in taxes. Get it right, and you’ll potentially keep thousands of dollars in your business instead of going to the IRS.

Not all dividends are treated equally by the IRS. Some get preferential tax treatment while others are taxed as ordinary income. Managing a corporate investment portfolio or planning distributions to shareholders yourself? Figuring out what are non-qualified vs qualified dividends could quite literally pay off.

Need to send and receive cross-border business payments?
Try Wise Business ->

Table of contents

What are dividends? What are qualified dividends? Requirements for qualified dividend status Qualified dividends tax rate What are non-qualified dividends? Common Types of Non-Qualified Dividends Non-qualified dividend tax rate Key differences between qualified and non-qualified dividends Why this matters for business owners What Americans abroad need to know about dividends Strategic considerations for dividend income Documentation and reporting Making informed investment decisions

This article has been written in collaboration with Vincenzo Villamena, CPA and co-founder of Online Taxman and Entity Inc.

What are dividends?

Dividends are payments that corporations make to shareholders from their profits. When your business holds stock in other companies, those dividend payments become part of your investment income. They can arrive quarterly, annually, or on whatever schedule the issuing company decides.

Your business reports this dividend income to the IRS, but the tax rate applied to that income changes depending on whether the dividends are classified as qualified or non-qualified.

What are qualified dividends?

Qualified dividends are considered the tax-friendly option. These are dividend payments that meet specific IRS criteria and get favorable tax treatment. Instead of being taxed at ordinary income tax rates, they are subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain.

Requirements for qualified dividend status

For a dividend to count as qualified, it needs to check three boxes:

First, it must come from the right source. The dividend has to be paid by a US corporation or a qualified foreign corporation. US corporations automatically qualify. Foreign corporations make the cut if they're incorporated in a US possession, eligible for benefits under a US tax treaty, or their stock trades on an established US securities market.

Second, you need to meet the holding period. Your business must have held the stock for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.¹ For preferred stock, you're looking at more than 90 days during a 181-day period beginning 90 days before the ex-dividend date. The IRS doesn't mess around with these timelines.

Third, the dividend can't be on the exclusion list. Some types of dividends never qualify for preferential treatment, no matter what. This includes capital gain distributions, dividends from tax-exempt organizations, and dividends paid on employee stock options.

Qualified dividends tax rate

Qualified dividends get a big tax break. The qualified dividends tax rate is set at 0%, 15%, or 20%, depending on your taxable income and filing status.² For most businesses and business owners, that's a significant discount compared to ordinary income tax rates, which can reach 37% at the federal level.

What are non-qualified dividends?

Non-qualified dividends (sometimes called unqualified dividends) are essentially the opposite. They don't meet the IRS requirements for qualified status. These get taxed at your ordinary income tax rate, which means they're treated just like your business's regular operating income.

Common Types of Non-Qualified Dividends

Several types of dividends automatically land in the non-qualified category:

• REIT dividends. Most dividends from real estate investment trusts are considered ordinary income because they represent pass-through income from the trust's operations rather than corporate profits that have already been taxed.

• MLP distributions. Dividends from master limited partnerships typically represent return of capital or ordinary income from partnership operations.

• Short-term holdings. If your business buys and sells stocks frequently without meeting those holding period requirements, the dividends won't qualify for preferential treatment.

• Money market fund dividends. Income received from Money market funds should be reported as dividends. The income reported as interest is the one generated by bank money market accounts.

• Employee stock option dividends. Dividends paid on shares acquired through employee stock options before they're exercised don't qualify.

• Tax-exempt organization dividends. Credit unions and certain other tax-exempt entities may make distributions that look like dividends but don't qualify for preferential tax treatment.

Non-qualified dividend tax rate

The non-qualified dividend tax rate matches whatever your business pays on ordinary income. For pass-through entities like S corporations, partnerships, and single-member LLCs, the dividends flow through to the owners' personal tax returns and get taxed at their individual rates, anywhere from 10% to 37% depending on their income bracket.³

For C corporations, you're looking at the corporate rate of 21%, though you might be eligible for a dividends-received deduction if the dividend came from another domestic corporation.⁴

Key differences between qualified and non-qualified dividends

What makes them different? Here are a few important details.

Tax treatment is the big one. Qualified dividends get the capital gains tax rates (0%, 15%, or 20%), while non-qualified dividends are taxed as ordinary income at rates up to 37% for individuals or 21% for C corporations, which is potentially double the tax rate.

Eligibility requirements separate them. Qualified dividends have to meet specific criteria about the source, your holding period, and the type of payment. Non-qualified dividends either don't meet these requirements or come from sources that are automatically excluded.

They show up differently on tax forms too. Your Form 1099-DIV shows both ordinary dividends (Box 1a) and qualified dividends (Box 1b). Always remember that the qualified dividend amount is always part of the ordinary dividend total. All qualified dividends are ordinary dividends, but not all ordinary dividends are qualified.

---

Wise Business Could Help Your Company Save on Global Payments

---

Why this matters for business owners

This information becomes really important when your business maintains an investment portfolio. If you're regularly buying and selling securities, your trading frequency directly impacts whether dividends get qualified treatment. Active trading strategies will generate mostly non-qualified dividends, while buy-and-hold approaches are more likely to produce those tax-advantaged qualified dividends.

For businesses receiving dividend income from foreign investments, the qualified foreign corporation requirements become especially relevant. And if you're running a C corporation and planning distributions to shareholders, you need to think about how those payments will be classified for your shareholders.

What Americans abroad need to know about dividends

Learn from the Experts at Online Taxman 🔍

The classification and tax treatment of dividends doesn’t change when the taxpayer lives abroad. Still, there are a few things that American expats should be aware of: The Foreign Earned Income Exclusion does not cover passive income like dividends. If your host country taxes US dividends, you might be able to use the Foreign Tax Credit to claim a dollar-for-dollar credit on your US tax return. A tax treaty between the United States and your host country may determine where US dividends can be taxed. Dividends from a foreign corporation usually don’t qualify for preferential US tax treatment. Beware of the PFIC trap with foreign investments. Investments in mutual funds through a non-US brokerage are potentially considered a PFIC and can trigger punitive US taxation. When you live abroad, taxes can become complex quickly. Talk to an experienced expat tax advisor to avoid filing and investment mistakes.

Strategic considerations for dividend income

How you handle dividend income comes down to strategy.

Timing can save you money. If you're thinking about selling a stock position that pays dividends, it might be worth waiting to meet the holding period requirement if the tax savings outweigh any potential market movement.

Your portfolio mix affects your tax bill. Investments that generate primarily qualified dividends will be more tax-efficient than those producing non-qualified dividends. Simple as that.

Keep good records. Make it a point to maintain detailed records of purchase dates, dividend payment dates, and ex-dividend dates for all securities. It’s better to be safe than sorry if the IRS comes knocking.

For businesses operating internationally, managing cross-border dividend payments adds another wrinkle. Watch out for exchange rates and international fees, and you could keep more of your dividend income. You can learn more about the tax side in our guide on how dividends are taxed.

Documentation and reporting

Come tax time, your investment broker or the paying corporation will send you a Form 1099-DIV by January 31st for the previous tax year. This form breaks everything down into the categories you need for tax reporting.

Box 1a shows total ordinary dividends—both qualified and non-qualified combined. Box 1b shows just the portion that qualifies for the preferential capital gains tax rates. The difference between the two boxes is the amount of non-qualified dividends.

If your business receives dividends from foreign corporations, you might have additional reporting requirements. Form 1116 might come into play if you need to claim foreign tax credits for taxes paid to other countries on that dividend income.

Making informed investment decisions

Qualified vs. non-qualified dividends should be treated as a guideline and not a rule. Other factors still matter when you invest. For instance, while it’s true that tax efficiency matters, it's just one factor alongside investment returns, risk tolerance, diversification needs, and your business's overall financial strategy.

Some investments produce primarily non-qualified dividends, but they also offer other advantages that make them worthwhile. Take REITs, for example. They provide exposure to real estate markets and often deliver solid yields, even though most of their distributions don't qualify for preferential tax treatment.

Paying attention to these classifications means your investments work harder for you, without messing with diversification or your plans.

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

This article has been written in collaboration with Vincenzo Villamena, CPA and co-founder of Online Taxman and Entity Inc.. Originally from Michigan, Vincenzo began his career at PwC before moving abroad in 2005. He founded Online Taxman to help other expats file and optimize their US taxes securely and easily from abroad and Entity Inc., which focuses on US companies for global entrepreneurs, from setup to compliance. He currently resides in Brazil. Online Taxman and Entity Inc. now proudly serves US expats and international entrepreneurs in almost every country in the world.

---

Sources:

1. Instructions for Form 1099-DIV (01/2024) | IRS
2. Dividend tax rate | Smart Asset
3. hFederal income tax rates and brackets | IRS
4. H.R.1 - An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. | congress.gov